Constraints Flashcards
Define constraint
A limiting factor that holds back the economic development of a nation
Define resource course
Refers to the paradox that countries with an abundance of natural resources, specifically non-renewable resources
Explain the Dutch disease
High export demand for natural resource —> currency appreciation —> other exports industries are less competitive
Explain why volatile commodity prices are detrimental to the economy
Large fluctuations in prices (supply and demand are inelastic) —> LEDC government revenue mostly comes from commodities so a fluctuation in price can cause havoc with government planning as tax revenue changes —> inability to service debt, cancellation of development programmes
Why may economic diversification be neglected by LEDCs
Short run —> profitable natural resources outcompete other industries
Successful natural resource exporting countries are dependent on extractive industries and dependent on MEDCs for capital and intermediate goods to help the LEDC build a capital stock for the manufacturing sector
Why may LEDCs neglect human resources
Resource curse crowds out human capital development —> LEDCs neglect education as they see no immediate need for it e.g. farmers and miners don’t need education to do their low skilled job
What are the political effects of the resource curse
Large revenue —> source of conflict between factions for share of the revenue —> provokes internal conflict between gov ministries for access to budgetary allocations
Why are low levels of health and education a constraint
Merit goods —> underconsumed
Incomes low —> tax revenue low so no money for investment in healthcare
Return on human capital development is uncertain compared to the immediate return for employment on the land
Why is poor infrastructure a constraint for LEDCs
Less FDI —> decreases productive efficiency and increases transport costs
Quality of life —> e.g. power cuts, unreliable communication network decreases living standards and reduces productivity
Why are low levels of technology and capital detrimental to an LEDC
Decreases consumption possibilities
Investment in future capacity —> production has to switch from consumer goods to capital goods —> opp cost current consumption foregone
Difficult to redirect resources to investment through tax system —> LEDCs = small tax base (population is mainly involved in informal sectors)
How do trading policies affect LEDCs
MEDC protectionism —> LEDCs can’t industrialised —> access to MEDC markets is difficult
MEDCs require protectionism —> lost comparative adv in manufacturing so are moving towards services —> requires expensive retraining of the workforce —> remain competitive with low labour cost countries
Why are high levels of public sector debt detrimental to LEDCs
Low savings ratio —> can’t generate the level of investment required to achieve growth —> inflows of foreign capital help fill the savings gap (loans, aid and FDI)
